Intel Corporation (INTC): Goldman see downside risk for the shares

Intel Corporation (NASDAQ:INTC) is having a certain amount of trouble at the moment as the PC market continues to decline faster than previously expected. Most of the concern among Intel investors has centered around the company’s lowered average selling price, and the shift in revenue mix. A Goldman Sachs Group, Inc. (NYSE:GS) report released on Sunday adds another problem to Intel’s growing list.

According to the report, investors should expect depreciation expenses at Intel Corporation (NASDAQ:INTC) to increase meaningfully in the coming months and years. That rise will continue to take a chunk out of the company’s gross margin, and will likely serve to push the firm’s share price lower. The Goldman Sachs Group, Inc. (NYSE:GS) report puts a price target of $16 on Intel and rates the company atSell.

CapEx explosion at Intel

In recent quarters some analysts have expressed worry at the increases in capital expenditure at Intel Corporation (NASDAQ:INTC). The company was clearly investing in its future, building foundries designed to make faster processors with newer technologies. The $10-$11 billion annual CapEx is eating into cash flows, but Goldman sees worse problems than that ahead.

The report, titled Pending rise in depreciation creates longer term margin risk; Sell, posits that the large increase in capital expenditure will naturally lead to an increase in depreciation as today’s investments become less useful in future and need to be replaced. Intel believes that its current CapEx spending is likely to remain at its current level for the foreseeable future. For Goldman Sachs Group, Inc. (NYSE:GS) that means depreciation is on the rise.

In 2013 depreciation at Intel Corporation (NASDAQ:INTC) is expected to hit $6.9 billion. The report predicts that the increase in depreciation will mean an added 200-600 bps headwind on gross margin.

Depreciation adds to Intel woes

Intel Corporation (NASDAQ:INTC) depreciation is currently at 13-14% of its revenue according to the Goldman Sachs Group, Inc. (NYSE:GS) numbers. That figure is higher than the 11% historical average and, according to Goldman, it’s only going up. Based on moderate to low growth in revenue in the next five years, and an increase in depreciation to match CapEx, the Goldman analysis sees depreciation hitting around 17% of revenue by 2018.

Coupled with the other big problems at Intel, including the fact that the company could be headed for a write down on excess supply in coming quarters, Goldman does not think now is the time to hold shares in Intel Corporation (NASDAQ:INTC). The firm is weak right now, and trends beyond its control are making it weaker.